Federal Judge Awards Mock $5 per Pallet, CHEP Decides Not to Appeal Proprietary Pallet Return: Series covering fair compensation for the return of stray pallets. Includes Mock trial update, Clarence Leising’s column on CHEP’s ARP and a summary of a recent survey on retrieval/return costs.

By Chaille Brindley Date Posted: 10/1/2006

In the latest round of a landmark case, Judge Beverly Martin has awarded Mock Pallet Company (MPC) $5 per pallet for fees associated with the retrieval and return of stray CHEP-marked pallets. The ruling is the highest judicial decision in the country issued to date on fair compensation for recycler services.

CHEP USA vs. Mock Pallet Co. examined what was fair compensation for MPC’s services and how much CHEP should receive in damages for 1,970 pallets MPC sold to third parties. After the court adjusted the total award for the CHEP-marked pallets that were wrongfully sold, the total compensation granted by the court amounted to $194,220.

CHEP has issued a statement challenging the significance of the case citing unique provisions to Georgia law. In a surprise move, CHEP has decided not to appeal the decision. Since CHEP is not challenging the outcome, it will have to pay the $5 fee for those pallets covered under this case.

While the court did not declare CHEP’s one-size-fits-all Asset Recovery Program (ARP) to be unjust, Judge Martin did award the Covington, Ga.-based recycler more than CHEP typically offers under the ARP. And she laid the groundwork for additional price concessions as warranted by market changes.

Judge Martin wrote, “Because the recapture of its pallets is so vital to CHEP’s business plan, it would certainly not be surprising to the court to see further upward adjustments to CHEP’s payments under the ARP. {CHEP’s internal analysis} shows that there is still a substantial margin within which the payments to recyclers could grow, while continuing to provide a benefit to CHEP.”

Ricky Mock, president of Mock Pallet, said, “We are very happy with the verdict. Judge Martin was very thorough and in-depth in her decision.”

CHEP argued that MPC should only receive 39 cents per pallet for recovery services because it did many of the functions it normally compensates recyclers for under its ARP. The court took a different view. It relied more on data about the value of the return of the pallet and not the exact cost to do various functions in the process. As instructed by the Eleventh Circuit Court of Appeals, Judge Martin measured compensation due to MPC “based upon the benefit conferred upon CHEP and not the cost to render the service or the cost of the goods.”

One disappointment for MPC is that Judge Martin refused to rule on just compensation for the return of CHEP-marked pallets that accumulate at MPC outside of 40,814 pallets covered by this case. Judge Martin called on both sides to develop a fair solution for the future.

A big part of the case was CHEP’s own internal documents and analysis that showed the value of return services could be much greater than what it offers recyclers through its ARP. According to internal CHEP analysis, collection and return of stray CHEP-marked pallets by recyclers could have a value to CHEP as high as $4.67 per pallet. In another valuation, this figure went much higher.

Judge Martin wrote, “Mr. Kolb (CHEP’s director of finance) testified that if CHEP could be assured that paying recyclers for pallets could guarantee that 100% of all lost pallets would be returned, such a result would justify a payment of $7.75 per pallet.”

In court, CHEP tried to downplay this information by pointing out that the value of the service likely reduced to somewhere in the lower range as it closed more holes and more recyclers participated in the ARP. But the court appeared to reject this argument.

Judge Martin wrote, “The evidence has overwhelmingly demonstrated that controlling CHEP pallets in the stream of commerce holds an enormous intangible value for CHEP. Specifically, if CHEP pallets were allowed to be abandoned into the stream of commerce, CHEP’s business plan, and likely therefore CHEP itself, would fail.”

The court also assessed damages due CHEP for the CHEP-marked pallets that MPC sold to those outside of CHEP’s network. Judge Martin ruled that MPC owed CHEP $5 per pallet.

While it may appear that MPC is walking away with a lot of money from the ordeal, after attorney’s fees, Ricky said that he will not make that much money for his trouble. But it was never about the money.

“I’m not fighting this legal battle for the money,” said Ricky. “I was doing it for the industry and to stand up for what is right.”

Both sides tried to use the outcome to make a case for their viewpoint. See the sidebar to read CHEP’s statement about the trial ruling and its decision not to appeal the case.

CHEP appears to be claiming that the decision means nothing outside of the state of Georgia and this particular case in general. This should not surprise anyone because CHEP wants to put as good of a spin on the ruling as it can and limit any potential industry reaction.

The recent Mock trial revolved around unjust enrichment. All parties agreed before the trial that MPC was not going to be considered a naked depository. Now CHEP appears to be making an issue out of it.

Regardless of the “naked depository” issue, the Eleventh Circuit Court of Appeals sided with MPC on the issue of conversion except for the cases where MPC outright sold CHEP-marked pallets to third parties. The Eleventh Circuit stated, “We think that refusal to turn the pallets over without reasonable payment would not be wrongful where the result would be unjust enrichment of the pallets’ owner.”

This leads one to ask what amounts to reasonable compensation. And that is exactly what Judge Martin sought to answer in the second trial. When she analyzed all the facts, she stopped short of calling the ARP unjust enrichment, but she did give MPC much more than CHEP currently offers in the ARP. She also stated that she felt CHEP has room to negotiate beyond the ARP and still receive a benefit from recycler services.

CHEP stated, “In other jurisdictions, the conversion claims would apply to pallets either sold or held.” First of all, CHEP doesn’t know what “other” jurisdictions will or will not do. That is why we have trials. The same goes for “other” jurisdictions giving the same conversion value to holding pallets as outright selling them.

CHEP is right that the Ohio courts ruled that refusing to allow CHEP to retrieve stray pallets amounted to conversion. But this appears to miss the main issue. A federal judge has ruled that $5 is a fair price. While each state has different ways of calculating unjust enrichment, this ruling could have a significant impact if recyclers around the country are smart about how they use it.

These initial cases have worked out much of the issues. Recyclers can use this legal information to their advantage if they desire to contend the ARP. There is a lot of collective legal knowledge if smart people choose to take advantage of it.

Judge Martin made the case that the ARP has been a good deal for CHEP, and it should be willing to negotiate higher rates of compensation as recycler costs rise.